US GDP Growth and EuroZone Deflation Come in Worse Than Expected Today

Today, news broke that US GDP growth was lower than expected and European deflation was worse than expected, and MoneyShow’s Jim Jubak thinks investors and traders now have to ask themselves one question…

So, which is the scarier news?

The US economy grew at a 2.6% rate in the fourth quarter of 2014. That was down from the 5% increase in the third quarter and below the 3% growth rate expected by economists surveyed by Bloomberg.

Inflation in the EuroZone fell to an annual negative 0.6% in January…that’s deflation, folks. That equals the biggest drop in prices in the history of the currency. Economists had expected prices to fall by 0.5%.

I vote my ‘scariest’ award to the European deflation figure.

The US number, while a negative surprise, did include some good news. And the Federal Reserve knows something about how to push growth higher; delaying the first interest rate increase would be a good start. Deflation, on the other hand, is notoriously difficult to stamp out if some of it becomes established. And there’s a good chance that the recent asset purchase program announced by the European Central Bank won’t even touch the problem, let alone increase inflation to anything like the 2% target.

The biggest piece of good news in the disappointing US GDP growth rate came in consumer spending. Most of the drop in the growth rate came from a decline in fixed investment spending (which climbed by only 2.3% in the fourth quarter after racing ahead at a 7.7% rate in the third quarter), from a 2.2% decline in government spending (due to a 12.2% drop in national defense spending), and an increase in the net export deficit (which took a full percentage point out of GDP growth, according to Briefing.com). Consumer spending, on the other hand, increased by 4.3% in the fourth quarter, for the biggest quarterly increase since the first quarter of 2006. The increase was spread across durables (up 7.4%) and nondurables (up 7.4%).

In other words, consumer spending, which makes up 70% of the US economy, remained strong in the quarter.

On the other hand, in the EuroZone, the deflationary trend remained in place with no signs of a reversal. Core inflation, which strips out the effect of falling energy prices, slowed to 0.6% in January from a 0.7% rate in December. That’s the lowest core inflation rate since the introduction of the euro back in 1999.

And, in case you missed it, the trend from December to January was in the wrong direction. More worryingly, inflation expectations continue to fall. Back in August, economists were projecting 2% inflation. On January 22, before the European Central Bank announced its program of asset purchases, economists were predicting 0.3% inflation in 2015 and 1.1% in 2016.

That’s getting awfully close to the kind of deflationary expectations that economists and central banks fear and that have haunted the Japanese economy for two decades.